Economists and policy-makers often struggle to know whether companies hire more workers, increase wages and boost investment after tax cuts, in part because of a lack of quality firm-level data. Using anonymised data from Xero, a new report by strategy advisory business, AlphaBeta, answers these questions by directly observing how Australian businesses responded to recent company tax cuts. 

From 1 July 2015, the tax rate for Australian businesses with a turnover of less than $2 million was lowered from 30 percent to 28.5 percent. At the time, over 90 percent of incorporated businesses fell under that turnover threshold. 

The analysis uses anonymised data from Xero Small Business Insights, a global small business bookkeeping, accounting, invoicing, taxes and payroll platform with over half a million subscribers in Australia. Using Xero’s data, researchers compared firms just below the $2 million turnover threshold that received the 2015 tax cut to firms in a control group just above the threshold that did not receive a tax cut. 

According to the report, the tax cut appears to have had no significant effect on wages and only a small effect on employment and investment in those companies that received tax relief.

Wage growth was in line, as firms just below the threshold increased their wages by 4.88 percent per employee in the year that the tax cuts were introduced, while firms that did not receive the tax cut increased their wages per employee by 4.84 percent. 

Employment growth was slightly higher for firms that received the 2015 tax cuts, which increased their employment by 2.6 percent in the year that the cuts were introduced. Firms that did not receive the tax cut increased employment by 2.1 percent.

There is also some evidence that the 2015 tax cuts encouraged firms to increase investment. Firms just below the threshold increased their investment by 2.45 percent in the year that the tax cuts were introduced, above the 1.53 percent invested by firms that did not receive the tax cut. 

However, low awareness of the tax cuts could have reduced their impact on employment, wages and investment, with many of the small businesses surveyed alongside the analysis saying they were not aware they had received a tax cut. 

In their conclusion, AlphaBeta notes that some of the effects of the tax reduction may take time to develop and their study considers the specific impact of the 2015 tax cuts on small businesses, which may not be generalisable to larger businesses.  

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